Bond Market Yield Curve Returns to Normal, Easing Recession Fears
The relationship between the 10-year and 2-year Treasury yield briefly normalized on Wednesday, reversing a classic recession indicator. Economic news showed a sharp decline in job openings, and dovish remarks from Atlanta Fed President Raphael Bostic led to the benchmark 10-year yield inching above the 2-year for the first time since June 2022. Both yields were around 3.79% on the session, with just a few thousandths of a percentage point separating them.
An inverted yield curve, where the nearer-duration yield is higher, has historically signaled most recessions since World War II. The normalization of the curve does not necessarily signal good times ahead, as the curve usually reverts before a recession hits. The U.S. could still face challenging economic conditions ahead.
A Labor Department report revealed that job openings unexpectedly dropped below 7.7 million in July, bringing supply and demand nearly even after a severe imbalance since the Covid crisis. Job openings had exceeded labor supply by more than 2 to 1 at one point, contributing to Inflation levels at their highest in over 40 years.
Atlanta Federal Reserve President Raphael Bostic indicated readiness to start reducing rates even with Inflation above the Central bank‘s 2% goal. Lower rates are viewed as beneficial for economic growth, with the Fed maintaining its benchmark rate at its highest level in 23 years since July 2023.
While the market closely monitors the relationship between the 2-year and 10-year yields, the Fed pays closer attention to the relationship between the 3-month and 10-year yields. That part of the curve remains steeply inverted, with the difference now exceeding 1.3 percentage points.
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Lucas Bennett, completed his Finance degree at Bocconi University in Italy in 2018. He is highly skilled in corporate finance and risk management, beginning his career at a hedge fund in Milan. Lucas expertise extends to consulting for leading European firms, particularly within the energy markets sector. His analytical skills and strategic mindset have made him a sought-after consultant, and he continues to explore new opportunities within the financial services industry across Europe.